George Osborne said the coalition was tackling "difficult choices" as he unveiled the political bargain at the heart of the budget: the scrapping of the 50p top rate of tax in exchange for accelerated progress towards removing 2 million low-paid workers from income tax.

Liberal Democrat MPs waved copies of their manifesto for the last general election as the chancellor announced the largest ever increase in the personal allowance to £9,025 from next year. This means that by 2014 the personal allowance will rise to £10,000 – the first line of the Lib Dem manifesto.

Conservative MPs, who are sensitive to being portrayed as the champions of the rich, were more muted when Osborne announced that the 50p top rate of tax for people earning over £150,000 would be replaced by a rate of 45p from next year.

The two announcements, hammered out over weeks of intense negotiations by the "quad" of the coalition's most senior cabinet ministers, will be funded by tough measures to tackle tax avoidance and a £2.4bn saving as Britain winds down its operations in Afghanistan.

Osborne's key announcements were:

Welfare

The chancellor announced a cut of £10bn in welfare spending in 2016-17 from a forecast bill for benefits, state pensions and tax credits in that year of £229bn.

He said in five years' time welfare would make up a third of all public spending, so to keep cutting spending at the current rate either welfare spending needed to fall another £10bn or other departments including education, health, defence and culture would have to cut spending even deeper.

Treasury officials insisted he was pointing out the "trade off" governments have to make, not insisting on welfare cuts.

Cuts to welfare spending will always be politically sensitive, but this £10bn would be on top of about £24bn savings already projected from the recent Welfare Reform Act; in total, the government would have to take £34bn out of the pockets of the most vulnerable people in society in that year.

Child benefit

The chancellor softened the withdrawal of child benefit from higher rate taxpayers. From January 2013 there will be no loss of child benefit until at least one parent earns £50,000, after which the benefit will be gradually reclaimed by a rising tax to £60,000, after which the family will stop getting the benefit at all. Under the new system 90% of families, around 750,000 households, would continue to receive child benefit, he said.

The new measures remove the dramatic "cliff edge" which meant that somebody earning £1 over the threshold would lose about £1,750 a year for two children, and the perceived unfairness that two people earning just below the threshold could still claim the full amount.

It also frees the chancellor to shift the 40p tax bracket, to reclaim some of the increased personal tax allowance for low earners without shunting thousands more families into the benefit cut.

The policy is still clunky, however, allowing a family with two earners on £49,000 to keep the full child benefit. And "proving eligibility … will be a chore for many and may cost more to administer than it is worth," said Frank Nash, a senior tax partner at chartered accountants Blick Rothenberg.

Business

The budget was, Osborne said, "unashamedly" pro-business and pro-aspiration. His measures to try to boost private sector confidence and growth ranged from headline cuts to basic tax allowances and the 50p top rate, to cutting corporation tax by 1p a year, and more specific measures like ultra-fast broadband and incentives for film-makers and animators.

But offsetting the cuts in corporation tax were a rise in business rates, lower allowances for investing in much plant and machinery, and continuing problems accessing finance, said the British Chambers of Commerce.

50p top rate tax abolished

The chancellor said it was right to abolish the 50p rate for people earning more than £150,000, in favour of a higher rate of 45p from next April, because the 50p rate had only raised £100m.

Alistair Darling, the former Labour chancellor, introduced the higher rate of tax in his penultimate budget in 2009. He introduced a rate of 45p in his pre-budget report in November 2008.

Osborne, who commissioned a report by HM Revenue & Customs into the 50p rate in last year's budget, said: "It raises at most a fraction of what we were told – and may raise nothing at all. So from April next year, the top rate of tax will be 45p.

"No chancellor can justify a tax rate that damages our economy and raises next to nothing. It is as simple as that."

But Ed Balls, the shadow chancellor, said that the report by HMRC, used by the chancellor to justify the change, showed that people earning more than £150,000 would receive a generous tax cut.

Balls told the House of Commons: "We can be absolutely sure that 300,000 top-rate taxpayers, who currently legitimately pay top rate tax, will see a tax cut averaging £10,000 per individual, £40,000 for a millionaire."

Personal tax allowance

Millions of working people will be £220 a year better off when the personal allowances rise to £9,025 from next April, the chancellor announced.

"Every working person on low or middle income will benefit," Osborne said. "Because higher rate earners will also benefit, 24 million people earning less than £100,000 a year will gain from this measure. We are in touching distance of the goal of £10,000 personal allowance that we all share."

Gavin Kelly, the chief executive of the independent thinktank the Resolution Foundation, said: "This budget is at least the first in which the coalition have not announced further reductions in the support for those on low to middle incomes – but reversing cuts to working tax credits should have been the priority. Increases in the personal tax allowance will provide some help to most of those in work and next year's increase has been targeted on basic rate tax payers with the gains to higher rate tax payers restricted which makes it less regressive."

Anti-tax avoidance

The chancellor described tax evasion and aggressive tax avoidance as "morally repugnant" as he announced anti-tax avoidance measures to raise £500m – five times the amount he claimed the 50p top rate of tax had been raising.

Stamp duty on properties worth £2m and above will be increased from 5% to 7%. The Lib Dems, who have been campaigning for a mansion tax on such properties, hailed the move as a "mansion purchase tax".

The chancellor announced that wealthy property owners who pay a lower stamp duty of 0.5%, by "enveloping" properties in companies, will face an immediate stamp duty of 15% on residential properties worth £2m or above.

Osborne said: "If you buy a property in Britain that is used for residential purposes, then we will expect stamp duty to be paid. That is the clear intention of Parliament.

"I will not hesitate to move swiftly, without notice and retrospectively if inappropriate ways around these new rules are found. People have been warned."

There will also be an annual charge on expensive properties cloaked by companies. This will vary from £15,000 for properties worth £2m-£5m, to £140,000 for properties worth more than £20m. The Liberal Democrat peer Lord Oakeshott of Seagrove Bay, who has been critical of the party leader, Nick Clegg, said: "We are half way there [towards the mansion tax]. It is a great triumph. This will irritate the hell out of the Tories."

Regional pay

The chancellor's announcement that the consultation on paying public sector workers different rates in different regions is to be reviewed will reinforce the sense that he is determined to press ahead with a substantial shakeup.

Osborne said the changes could "make our public services more responsive, and help our private sector to grow and create jobs in all parts of the country".

Public sector unions are likely to oppose the plan tooth and nail, seeing in it a Conservative ambition to weaken their power.

The TUC, however, warned that lowering pay in less prosperous regions would take money out of the local economies, entrenching their problems still further.